File an S Corp in Oregon

Kicking off an S corporation in Oregon is an exciting step for an entrepreneur eyeing the unique blend of benefits this state offers to businesses. With Oregon’s reputation for fostering innovation and its supportive business environment, opting for an S corp structure could be your ticket to maximizing tax savings. This guide is here to navigate you through the intricate process of establishing your S corp in Oregon, from understanding eligibility requirements to tackling the necessary legal paperwork, helping ensure you’re well-positioned to use the full potential of your business in the Beaver State.

Limitations and Requirements of S Corporations

You need to know the S corp filing requirements and limitations before you begin this process. To qualify for S corporation status, a business entity must:

• Be a domestic corporation or LLC
• Not be an ineligible corporation, such as insurance companies, certain financial institutions, and domestic international sales corporations
• Have just one class of stock
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals and certain trusts and estates. The shareholders can’t be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who hasn’t passed the green card test or the substantial presence test.

As you can see, not all business entities are eligible for S corp classification. However, if your business meets these requirements, you can apply to be an S corp. 

Filing as an S Corp in Oregon

To create an Oregon S corporation, you’ll need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the Internal Revenue Service (IRS).

Oregon-Specific Considerations

In an S corp, the business itself doesn’t usually pay federal income taxes. But what about state income taxes?

In Oregon, S corporations experience a “pass-through” tax structure where the corporation’s income, deductions, and credits pass through to the shareholders, who report this on their individual income tax returns. Oregon’s individual income tax rates range between 4.75% and 9.9%, depending on the taxpayer’s income level.

While the S corporation’s income is taxed at the shareholder’s individual tax rates, the corporation itself must still pay a minimum tax to the state, which is based on the S corporation’s Oregon sales. For sales up to $500,000, the minimum tax is $150 (this is only for S corps doing business in Oregon itself); it escalates from there, reaching $100,000 for sales over $100 million.

S corporations in Oregon are obligated to file an annual state business income tax return, Form OR-20-S, detailing the income, deductions, and credits, even if no tax is owed. Failure to file this form can result in penalties, making it crucial for compliance with state laws. Note that those who choose to organize in Oregon but don’t have Oregon-based sales or any other business in Oregon won’t be required to pay a minimum tax or to file Form OR-20-S. In fact, Filing Form OR-20-S when not required may create a tax bill for the minimum amount.

A couple of other points to note:

• Oregon S corporations must make quarterly estimated tax payments if they expect to generate $500 or more in sales in Oregon.
• Oregon S corporations are required to withhold part of a non-resident S corporation owner’s share of income but only when the S corporation has sales in Oregon.  

Filing for S corp election can provide savings on self-employment taxes for certain members (owners) of a limited liability company. For a C corporation (the default form of corporation), S corp status can be a way to avoid double taxation. To learn more about S corps, visit our “What Is an S Corporation?” page. 

S-Corp Election Steps for LLCs

For detailed formation steps, see our Oregon LLC formation guide.

• Step 1 – Choose a name 
• Step 2 – Designate your registered agent
• Step 3 – File the Oregon Articles of Organization 
• Step 4 – Create an operating agreement
• Step 5 – Apply for an EIN
• Step 6 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our Oregon Corporation formation guide.

• Step 1 – Name Your Oregon Corporation
• Step 2 – Appoint Directors
• Step 3 – Choose an Oregon Registered Agent
• Step 4 – File the Oregon Articles of Incorporation
• Step 5 – Create Corporate Bylaws
• Step 6 – Draft a Shareholder Agreement
• Step 7 – Issue Shares of Stock
• Step 8 – Apply for Necessary Business Permits or Licenses
• Step 9 – File for an EIN and Review Tax Requirements
• Step 10 – Submit Your Corporation’s First Report
• Step 11 – Apply for S Corp status with IRS Form 2553

Apply for S corporation status

Submit the form to apply for S corp election. You need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One condition for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Advantages and Disadvantages of Filing as an S Corp

While S corp election comes with some benefits for some businesses, making this election might not be right for all businesses. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t quite the same as they are for C corporations. Let’s look at the advantages for LLCs first.

A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.

Self-Employment Taxes Explained

The members of a standard LLC are considered self-employed. They’re compensated by getting their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than what they’d pay when working for someone else because their employer would pay part of them.

Dividing Profits and Salary

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee of the LLC. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay personal income tax and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. If not, you could pay yourself an annual salary of 15 bucks and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something akin to what others in your field are earning.

If the IRS determines that your salary isn’t reasonable, it can reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp has its advantages:

Pass-Through Taxation

One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are taxed only at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

We should note that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. Thus, the disadvantages of double taxation aren’t as severe now as they were. Read the pass-through taxation definition for more.

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their own personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct as much as 20% of their qualified business income (QBI). This deduction isn’t available to C corporation shareholders.

Qualified business income is basically your share of the company’s profits, or, as the IRS describes it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has more details as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for more info).  

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some negatives over a traditional LLC, too:

Stricter Requirements 

As we listed above, S corps have more qualifications than a standard LLC or C corporation. An S corp can’t have more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. 

In fact, LLCs filing as an S corp may want to observe some of the same formalities that corporations do, even if they’re not legally required to. It’s not necessary to appoint initial corporate directors and corporate officers or write corporate bylaws, but keeping something similar to a corporate records book could be useful if the business is audited.

More Bookkeeping and Accounting

Having an LLC that files as an S corporation usually means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start doing so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

S corp status also has its minuses:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue if the corporation expands and goes public later.

Disadvantages of S Corp Status for C Corporations

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have those limitations.

One Class of Stock

One way corporations attract investors is to offer preferred stock. That’s allowed for C corporations, but the IRS doesn’t allow it for S corps.

Additional IRS Scrutiny

Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.

It’s important to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

Get help establishing an Oregon LLC with S corp tax election

Forming a business is often complicated, but we’re here to make it as easy for you as possible.

When you’re ready to take the leap, we can help you form an Oregon LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward.